Salinas Valley Memorial rejects merger with Natividad

Salinas Valley Memorial Hospital will not pursue affiliation, at least for now, its board of directors decided Thursday.

The board rejected a proposed merger with county-owned Natividad Medical Center — its last partnership option — and chose to remain a stand-alone public district hospital.

In its unanimous decision, the board cited the challenges posed by Natividad's demands for rapid cost-cutting and its failure to meet the affiliation requirements. Board member Deborah Nelson was absent.

The board also indicated that the uncertainty surrounding state legislation required for the partnership was a factor.

At the same time, the board left open the possibility that it could reconsider affiliation in the near future, after the hospital makes progress on aligning its costs with declining revenue.

Board member Pat Egan, who served on a steering committee that recommended rejecting the merger, said Natividad's proposal left too many unanswered questions about the future of the health care district and the potential impact of deep cuts on Salinas Valley Memorial's service quality and employees.

The merger, he said, "is not appropriate for us at this time. At this point, we have two different cultures."

In a statement, Natividad CEO Harry Weis expressed "disappointment that a significant opportunity has been lost for our community."

Weis said he recognized the decision was not an easy one "in light of future changes in health care affecting us all." But he said a merger would have helped develop a "seamless inpatient and outpatient health care system for our community" and "allowed our community to rally around a new model public health care system, which would have the capability of enhancing the overall health of everyone on the Central Coast."

"By not joining together we believe our community will be forced back into a competitive health care environment, which in the long run could negatively impact both hospitals," Weis said.

Weis declined to comment beyond the statement.

According to a presentation from Jim Moloney of affiliation consultant Cain Brothers, Natividad's proposal would have required Salinas Valley Memorial to trim $38 million in operating costs from its budget in 2013.

According to the presentation, Natividad failed to provide key assurances on a number of issues, including:

· that Salinas Valley Memorial would remain open for at least 20 years;

· that it would retain certain decision-making power, such as discontinuation of services;

· that it would be provided $75 million over the first five years to meet capital needs;

· that all current union contracts would be honored and all current employees be offered a job, or offered up to $50,000 in severance per employee.

Moloney's presentation indicated that Natividad provided a financial forecast with questionable assumptions and did not complete a detailed plan to continue hospital-based and clinic service arrangements through at least the end of 2014.

Salinas Valley Memorial board president Jim Gattis, who also served on the steering committee, said the hospital would have required any organization to provide the same guarantees demanded from Natividad.

Gattis said the crucial difference between Natividad's proposal and an acquisition bid originally offered by HCA Healthcare — a giant, for-profit corporation that dropped out of the process — was that a merger with the local hospital would have added $68.8 million in debt, while HCA would have contributed $75 million in cash for capital needs.

Moloney's presentation pointed out that HCA dropped out of the affiliation process after expressing concerns about the hospital's need to absorb deep cuts to better align its finances, the potential impact on community and labor relations, and the need for a major capital investment by 2030 to meet state seismic regulations.

The hospital would still need to achieve a $40 million improvement in its bottom line if it remains a standalone entity, according to the presentation. But Gattis said the hospital will have a more flexible timeline for reaching that goal and an increased capacity for revenue growth than it would under the merger.

Egan said the effort to balance the hospital's balance sheet should begin as soon as possible in collaboration with various employee groups. Gattis said he was encouraged by those groups' willingness to help contribute to a solution and promised the work would begin soon.

Egan said the board's decision was "not the end of the book — it's the end of the first chapter of the book."

Gattis thanked Weis and Natividad officials for their "thoughtful proposal" and said he recognized that collaboration among local health care entities would be necessary to ensure quality care in the future.

The board is now expected to begin the process of hiring a permanent CEO. Interim CEO Lowell Johnson's contract lasts through the end of the year.

Weis said the state legislation aimed at allowing the merger will proceed. Assembly Bill 276, backed by Assemblyman Luis Alejo, D-Watsonville, would allow Natividad to consider a different affiliation, though Weis said there is nothing in the works.